Should you have a diversified investment portfolio?
Should you diversify your investment portfolio? The answer is not a straight ‘yes’ or ‘no’.
Keeping a concentrated investment plan always has its own benefit of high return, but it also has a big risk of loss.
Probably the most stand-alone benefit of a diversified investment portfolio is, even if one investment plan gets compromised, you have other active plans to look forward to.
This article is simple, and will hit the point straight! Should you consider diversification as a part of your investment strategy? Or, should you keep it converged and focus on a single plan alone?
What is the investment portfolio diversification and what are the different investment options you have?The point of diversification is to have more than one investment types in your hand.
Here I will make a justice. I very well know, not everyone who’s reading this post is a pro in the investment subject.
So I want to give a basic idea, as to what are the options for investments in the current economic market.
# You can go for the traditional bank products:
No investment can be successful if the investor does not have backed up securities to compensate for any loss incurred in investment plans.
The only way to have such securities is to have at least more than one savings account! This is what a bank product looks like. The products can range from normal savings accounts to certificate of deposits and different money market accounts!
Bank products can also be said as the first step towards investment. Your investment portfolio is definitely not complete if you don’t have minimum one bank product.
Some people even like to play it safe and are only interested in bank products or normal savings accounts. They are happy with the interest rates provided on these accounts alone and don’t want to invest more, in other fields.
# The stocks and shares:
This is what we call mainstream investing. After you have built enough savings, it is time to enter the stock market.
For those who have a faint idea on stocks, I will break the definitions one by one.
When a company is established, it issues shares on its interest to gain the capital it requires. Normal citizens or people will then buy those shares to help the company grow. If the company profits, and if you have bought shares, then you will also profit. If the company incurs a loss, you will also lose money.Now stocks are a collection of shares. In other words, whenever you buy more than one share, it means you are buying a stock of shares or stocks for a specific company!
Here you can diversify your investment portfolio, by purchasing stocks from more than one company, or company types. Say, for example, you have stocks from a reputed food chain company and one telecom company.
# Mutual funds:
The topmost advice you can get from any financial advisor is to invest in mutual funds if you want to diversify your investment portfolio.Portfolio diversification is none other than distributing your risk factors on all of your investment plans, rather than only pressurizing one single investment basket!
Mutual fund plays a great role in this case. It is a collection of various stocks and bonds, that may or may not result from the same types of companies.
So practically you are spreading the risk factor on several investment securities and assets. Securities and assets are the components of your portfolio. They are stocks, bank products, real estates, gold, and so on.
Hence if you want to go for investment portfolio diversification, then mutual fund should definitely be one of your options to consider. They are the most hassle-free way to invest in several securities and assets at the same time.
As the name suggests, mutual fund schemes have many investors included in the pooling of the funds. So, not only you are spreading your risk on various assets, but also the risk is being shared by many investors.
# Other investment options open to you:
- You have bonds.
These are loans that demand you as a lender. The loans are issued by corporates and government sectors, with very distinct purposes.
Usually, it’s better to go for bonds that are associated with the government.
- You can also invest in real estates, gold, debentures, and many other assets. But whatever investment option you choose, you should have a brief talk with a financial advisor to see what will give you a good return, and what can count as a loss for you!
- You should also consider your retirement investment options like Roth IRA or a 401(k) plan.
But try to avoid the retirement mistakes to get more return on your investments.
So should you diversify your investment portfolio?
To summarize the whole post, I will be displaying the pros and cons of portfolio diversification.The pros:
- The risk is shared by more than one asset, and if you incur a loss, it won’t be that problem for you to recover with the help of other assets.
- If you consider mutual fund, then it kind of works like an insurance, where there are many investors to pull each other up, in times of a heavy downfall. Probably that’s why the name is mutual, and not unit fund!
- You have many securities and assets with you, that I believe at least for me, is a mental satisfaction.
- You have too many components to handle, that means more headache and less peace of mind.
- Diversification can make you fall into more debts. If you believe that you don’t have enough resource, then stay calm with one type of investment plan.
As an end note I would want to say, diversification doesn’t mean buying too many assets and securities.
It means sensible buying. So, if you own 2 assets with a high rate of inflation, then you have diversified your portfolio successfully.